Recession is a possibility, admits the EC

I am City A.M's deputy editor, having joined the newsroom in late 2010 as an economics reporter.

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Julian Harris

THE WORLD economy is back in the “danger zone”, the European Commission admitted yesterday as it slashed the Eurozone’s growth forecast for next year to a paltry 0.5 per cent – massively down from its previous estimate of 1.8 per cent growth.

“We do not expect a recession in our baseline scenario,” the EC report said. “But the probability of a more protracted period of stagnation is high.”

Yet the EC’s economists said they could not rule out a “a deep and prolonged recession complemented by continued market turmoil”.

“This forecast is in fact the last wake-up call,” the European Union’s economic and monetary affairs commissioner Olli Rehn warned. “Growth has stalled in Europe, and there is a risk of a new recession.”

The UK’s economy is on course to expand by just 0.6 per cent in 2012, the EC expects, despite predicting growth of 1.7 per cent in its spring forecast.

And the global economy is now forecast to grow by just 3.5 per cent next year, rather than the 4.1 per cent previously predicted.

“In spring, it looked as if Europe’s sovereign-debt troubles remained contained,” the EC said, adding that signs of growing domestic demand had led to hopes of economic recovery. “These hopes were dashed,” it said.

Troubled Italy faces virtual stagnation next year, with the EC slashing its forecast from one per cent growth to just 0.1 per cent.

Yet there is “no silver bullet to restore confidence at this juncture” the EC report said. “What is needed is a bold and encompassing strategy that is implemented with a steady hand over the long haul. Policy surprises or ambiguity in ambition are not helpful.”

The EC remains upbeat about prospects in 2013, however, expecting the Eurozone’s economic growth to more than double to 1.3 per cent.